Vodafone India CaseVodafone Group Plc has a law suit brought against it for evading paying $2.5 billion in tax to the Income Tax Department after it successfully acquired Hutchison Essar Telecom services in the month of April in 2007. The Tax authorities of India argues that the transaction entailed the buying of assets belong to an Indian company, and consequently part of the transaction is liable to being taxed by the tax authority of India. On its part, Vodafone Group Plc secured its entry into the Indian market through its subsidiary in Netherlands which went ahead to acquire Hutchison Telecommunications International Limited share in Hutchison Essar Ltd.
Hutchison Essar Ltd is the joint venture that operated and held telecom licenses in India. Vodafone gained control of 67% of the company. This deal edged out Hutchison which is based in Hong Kong and it cost Vodafone $11.2 billion. The issue of controversy involves the jurisdiction of Indian Tax Department of imposing tax on this deal. The verdict will have a lot of significance to international business with a focus on foreign investment into the Indian market.
Tax aversion and avoidance has been used by many international business entities in earning excess profits. Tax heavens have been advanced on this premise of avoiding taxes. On the other hand, India has been known to be unfavorable to international business. Question oneThe mode of entry that Vodafone decided to use on entering India market has its own pros and cons. In the India case, Vodafone used acquisition to enter the market. Acquisition and mergers are a convenient way of gaining entry into a new market without the hustle of having to go through the registration procedures.
Acquisitions and mergers have been applied by many international investors in gaining entry into foreign markets. Pros of acquisitionsMergers and acquisitions have an advantage of creating a huge profit for a company and expose the business to established financial resources. A company that is almost going bankrupt or is experiencing financial troubles, merging with another partner can be a way of salvaging the business from collapsing. Some of the needed cash or credit can be provided through this means.
Acquiring a business for the objective of coming up with a business consortium or a conglomerate is one good advantage of existence of mergers and acquisitions. Vodafone acquired 67% share of Hutchison Essar for a price of $10.7 billion. The company was consequently renamed Vodafone Essar. Vodafone wanted the quest way of gaining entry and extending its growth in India through this acquisition (Llewellyn, 2002). Acquisitions and mergers have to adhere to rules and regulation set by trading regulation bodies. The needs of the existing stakeholders have to be fully addressed. Employees have to be compensated in case they have to leave the new organization. Acquisitions provide a rare opportunity for a business or corporate entity to grow or extend its presence.
The Vodafone case shows how Vodafone made its presence felt in the Indian market. Therefore acquisitions can be used as an effective growth strategy. Acquisitions can be used to evade some of the taxes that are levied on direct investment. In the Vodafone case, however, the company is still being asked to pay taxes amounting to $2.5 billion on the argument that the assets of the company were Indian owned.
Acquisition is a good way of increasing revenues and sales and providing access to new markets. Brand portfolio can be easily expanded if the targeted business is complementary to the company. Economies of scale and efficiencies can be achieved through acquisitions as the business as expands its ways of operation.